United States. Congress. House. Committee on the J.

Aircraft Equipment Settlement Leases Act of 1993 : hearing before the Subcommittee on Economic and Commercial Law of the Committee on the Judiciary, House of Representatives, One Hundred Third Congress, first session on H.R. 1140 ... March 10, 1993 online

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Online LibraryUnited States. Congress. House. Committee on the JAircraft Equipment Settlement Leases Act of 1993 : hearing before the Subcommittee on Economic and Commercial Law of the Committee on the Judiciary, House of Representatives, One Hundred Third Congress, first session on H.R. 1140 ... March 10, 1993 → online text (page 1 of 4)
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AIRCRAFT EQUIPMENT SETTLEMENT LEASES

ACT OF 1993 " nnv/'f



.



HEARING



BEFORE THE n/MlPDI ^ LAW LIE

SUBCOMMITTEE ON
ECONOMIC AND COMMERCIAL LAW

OF THE

COMMITTEE ON THE JUDICIAKY
HOUSE OF REPRESENTATIVES

ONE HUNDRED THIRD CONGRESS

FIRST SESSION
ON

H.R. 1140

TO PROVIDE FOR THE TREATMENT OF CERTAIN AIRCRAFT EQUIPMENT

SETTLEMENT LEASES



MARCH 10, 1993

T

Serial No. 2




Art li -^o



J



BOSTON PUBLIC LIBRARY

I GOVERNMENT DOCUMENTS DEPARTMENT

Printed for the use of the Committee on the Judiciary



U.S. GOVERNMENT PRINTING OFFICE
67-705 CC WASHINGTON : 1993

For sale by the U.S. Government Printing Office
Superintendent of Documents. Congressional Sales Office. Washington, DC 20402
ISBN 0-16-041096-7



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AIRCRAFT EQUIPMENT SETTLEMENT LEASES

ACT OF 1993 "" cnvf




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HEAKINCr—

BEFORE THE

SUBCOMMITTEE ON
ECONOMIC AND COMMERCIAL LAW

OF THE

COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES

ONE HUNDRED THIRD CONGRESS

FIRST SESSION
ON

H.R. 1140

TO PROVIDE FOR THE TREATMENT OF CERTAIN AIRCRAFT EQUIPMENT

SETTLEMENT LEASES



MARCH 10, 1993



Serial No. 2

r




( r , i «ftrt<j



BOSTON PUBLIC LIBRARY

GOVERNMENT DOCUMENTS DEPARTMENT



Printed for the use of the Committee on the Judiciary



U.S. GOVERNMENT PRINTING OFFICE
67-705 CC WASHINGTON I 1993

For sale by the U.S. Government Printing Office
Superintendent of Documents. Congressional Sales Office, Washington. DC 20402
ISBN 0-16-041096-7



COMMITTEE ON THE JUDICIARY
JACK BROOKS, Texas, Chairman



DON EDWARDS, California
JOHN CONYERS, JR., Michigan
ROMANO L. MAZZOLI, Kentucky
WILLIAM J. HUGHES, New Jersey
MIKE SYNAR, Oklahoma
PATRICIA SCHROEDER, Colorado
DAN GLICKMAN, Kansas
BARNEY FRANK, Massachusetts
CHARLES E. SCHUMER, New York
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JOHN BRYANT, Texas
GEORGE E. SANGMEISTER, Illinois
CRAIG A. WASHINGTON, Texas
JACK REED, Rhode Island
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
DAVID MANN, Ohio
MELVIN L. WATT, North Carolina
XAVIER BECERRA, California



HAMILTON FISH, JR., New York
CARLOS J. MOORHEAD, California
HENRY J. HYDE, Illinois
F. JAMES SENSENBRENNER, JR.,

Wisconsin
BILL MCCOLLUM, Florida
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
LAMAR S. SMITH, Texas
STEVEN SCHIFF, New Mexico
JIM RAMSTAD, Minnesota
ELTON GALLEGLY, California
CHARLES T. CANADY, Florida
BOB INGLIS, South Carolina
BOB GOODLATTE, Virginia



JONATHAN R. YAROWSKY, General Counsel

ROBERT H. BRINK, Deputy General Counsel

ALAN F. COFFEY, JR., Minority Chief Counsel



Subcommittee on Economic and Commercial Law

JACK BROOKS, Texas, Chairman

JOHN CONYERS, JR., Michigan HAMILTON FISH, JR., New York

MIKE SYNAR, Oklahoma ELTON GALLEGLY, California

PATRICIA SCHROEDER, Colorado CHARLES T. CANADY, Florida

DAN GLICKMAN, Kansas BOB INGLIS, South Carolina

HOWARD L. BERMAN, California BOB GOODLATTE, Virginia

RICK BOUCHER, Virginia CARLOS J. MOORHEAD, California
ROBERT C. SCOTT, Virginia
DAVID MANN, Ohio
MELVIN L. WATT, North Carolina

Cynthia W. Meadow, Counsel

GEORGE P. SLOVER, Assistant Counsel

PERRY APELBAUM, Assistant Counsel

CARRIE BEDWELL, Assistant Counsel

PETER J. LEVINSON, Minority Counsel



(ID



CONTENTS



HEARING DATE



Page

March 10, 1993 1

TEXT OF BILL
H.R. 1140 3

OPENING STATEMENT

Brooks, Hon. Jack, a Representative in Congress from the State of Texas,

and chairman, Subcommittee on Economic and Commercial Law 1

WITNESSES

Drabkin, Murray, Hopkins & Sutter, on behalf of the National Bankruptcy

Conference 11

Lockhart James B., Ill, former Executive Director, Pension Benefit Guaranty
Corporation 5

Scherer, Scott, assistant treasurer, the Boeing Co 18

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Drabkin, Murray, Hopkins & Sutter, on behalf of the National Bankruptcy
Conference: Prepared statement 14

Lockhart James B., Ill, former Executive Director, Pension Benefit Guaranty
Corporation: Prepared statement 8

Scherer, Scott, assistant treasurer, the Boeing Co.: Prepared statement 20

APPENDLX

Material Submitted for the Hearing Record

Reich, Hon. Robert, Secretary of Labor: March 9, 1993, letter 33

Laderman, Gerald, staff vice president for legal affairs, financial and aircraft
programs, Continental Airlines: March 10, 1993, statement 35



(HI)



AIRCRAFT EQUIPMENT SETTLEMENT LEASES ACT

OF 1993



WEDNESDAY, MARCH 10, 1993

House of Representatives,
Subcommittee on Economic and Commercial Law,

Committee on the Judiciary,

Washington, DC.

The subcommittee met, pursuant to notice, at 10:15 a.m., in room
2141, Rayburn House Office Building, Hon. Jack Brooks (chairman
of the subcommittee) presiding.

Present: Representatives Jack Brooks, John Conyers, Jr., Mike
Synar, Robert C. Scott, David Mann, Melvin L. Watt, Hamilton
Fish, Jr., Elton Gallegly, Charles T. Canady, Bob Goodlatte, and
Carlos J. Moorhead.

Subcommittee staff present: George P. Slover, assistant counsel;
Perry Apelbaum, assistant counsel; Carrie Bedwell, assistant coun-
sel; Catherine S. Cash, research assistant; Deloris L. Cole, office
manager; and Suzanne Young, secretary; full committee staff
present: Jonathan R. Yarowsky, general counsel; Daniel M.
Freeman, counsel; and Peter J. Levinson, minority counsel.

OPENING STATEMENT OF CHAIRMAN BROOKS

Mr. Brooks. The subcommittee will come to order.

Today the subcommittee is considering H.R. 1140, legislation
that I introduced to clarify the status of equipment settlement
leases with bankruptcy by air carriers. Prior to the enactment of
the 1978 code, the bankruptcy laws provided aircraft equipment
leasage with special protection in the event of an airline bank-
ruptcy. Section 1110 of the code was intended to encourage aircraft
financing activity by limiting the bankruptcy risk associated with
such leases.

In passing the provision Congress knew full well the importance
of air travel to Americans and the need to have enough viable com-
petitors to withstand the rigors of the deregulation process which,
sadly, by 1993 has almost decimated the industry.

Unfortunately, because of several ambiguous legal decisions the
coverage of 1110 has become muddled. Trie resulting uncertainty
threatens to disrupt the reorganization of Continental and other
airlines that may be forced to seek bankruptcy protection in the fu-
ture.

If the uncertainty results in these airlines being forced to liq-
uidate, I am deeply concerned that competition could be severely
impaired. The flying public, and that's all of us in this room and

(l)



over half of our constituents, could ultimately be made to pay the
price in the form of higher fares, fewer choices, diminished service.

Liquidation would also subject the employees and the retirees of
the airlines as well as the Pension Benefit Guaranty Corporation
to severe economic dislocation.

Now H.R. 1140 responds to these problems by clarifying the ap-
plication of section 1110 of the code. Under the simple modification
proposed, a leasing arrangement which the parties agree to treat
as a lease will be treated as such for bankruptcy purposes. That
is what the whole bill does.

This change would apply to pending and future bankruptcies,
and will help struggling air carriers emerge from bankruptcy.

This subcommittee has rather wide economic jurisdiction, with
antitrust and bankruptcy comprising the major subject areas. I be-
lieve that the need for legislation in this case is every bit as nec-
essary from the competitive standpoint as it is from the bankruptcy
clarification point of view.

[The bill, H.R. 1140, follows:]



103d congress
1st Session



H.R.1140

To provide for the treatment of certain aircraft equipment settlement leases.



IN THE HOUSE OF REPRESENTATIVES

February 25, 1993

Mr. BROOKS introduced the following bill; which was referred jointly to the

Committees on the Judiciary and Education and Labor



A BILL

To provide for the treatment of certain aircraft equipment

settlement leases.

1 Be it enacted by the Senate and House of Representa-

2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the "Aircraft Equipment

5 Settlement Leases Act of 1 9 9 3 " .

6 SEC. 2. TREATMENT OF AIRCRAFT EQUIPMENT SETTLE-

7 MENT LEASES WITH THE PENSION BENEFIT

8 GUARANTY CORPORATION.

9 In the case of any settlement of liability under title
10 IV of the Employee Retirement Income Security Act of



2

1 1974 entered into by the Pension Benefit Guaranty Cor-

2 poration and one or more other parties, if —

3 (1) such settlement was entered into before, on,

4 or after the date of enactment of this Act,

5 (2) at least one party to such settlement was a

6 debtor under title 11 of the United States Code, and

7 (3) an agreement that is entered into as part

8 of such settlement provides that such agreement is

9 to be treated as a lease,

10 then such agreement shall be treated as a lease for pur-

1 1 poses of section 1110 of such title 11.

o



Mr. Brooks. With this in mind, I welcome our distinguished set
of witnesses. If members have any opening statements, we would
be glad to include them or we will go right to the witnesses and
hear them.

This morning I asked our witnesses to appear as a panel to dis-
cuss H.R. 1140. To save time, I request each of the witnesses to
summarize his statement in no more than 5 minutes.

After the witnesses have completed their statements, the sub-
committee will address questions to the panel. All prepared state-
ments will be made part of the hearing record, of course.

The first witness is James B. Lockhart, the former Executive Di-
rector for the Pension Benefit Guaranty Corporation, currently the
managing director for Smith, Barney, Harris, Upham & Co. in New
York.

Next we welcome back to the Judiciary Committee an alumnus,
Murray Drabkin, in the center, who served as counsel on bank-
ruptcy matters from 1957 to 1965. I remember him well and I still
recognize him. He says he is on the personal straight-term depre-
ciation schedule.

[Laughter.l

Mr. Brooks. He is now with the law firm of Hopkins & Sutter
and today he appears on behalf of the National Bankruptcy Con-
ference.

The final witness will be Scott Scherer, assistant treasurer of the
Boeing Co. He testified before this committee last August during
its hearing on commercial and public sector issues in bankruptcy.

Without objection, I would like to enter into the record a letter
signed by Robert Reich, the Secretary of Labor, expressing support
for H.R. 1140, and a statement submitted by Continental Airlines
in support of the bill.

[See appendix.]

Mr. Brooks. Mr. Lockhart, you are recognized.

STATEMENT OF JAMES B. LOCKHART IE, FORMER EXECUTIVE
DIRECTOR, PENSION BENEFIT GUARANTY CORPORATION

Mr. Lockhart. Mr. Chairman and members of the subcommit-
tee, I am pleased to be here to discuss PBGC and support your bill,
H.R. 1140.

The views I express today are my own.

PBGC is a Government insurance corporation with the very im-
portant mission of supporting the retirement security of 41 million
Americans in 67,000 pension plans.

While the vast majority of the Nation's defined benefit pension
plans remain fully funded, the insurance program is facing growing
problems from poorly funded pension plans of troubled companies.
PBGC's deficit for the single employer program has grown over the
past 3 years from $1.1 billion to $2.7 billion.

Underfunding and ongoing pension plans have doubled since
1990 to an estimated $51 billion. Well over $30 billion of the
underfunding is concentrated in the plans of a relatively few firms
in the steel, auto, tire, and airline industries. Financially troubled
companies present a near-term risk of $12 to $20 billion to the
PBGC.



Using the estimates of those troubled companies, PBGC's latest
10-year forecast shows a pessimistic deficit range of $16 to $28 bil-
lion at the end of 10 years.

The financial problems are a consequence of fundamental weak-
nesses in the insurance principles supporting the program. The
moral hazards of inadequate minimum funding rules, liberal guar-
antees, low premiums for underfunded plans, and low recoveries in
bankruptcy encouraged financially weak companies to underfund
their pension plans.

Legislative reforms were introduced over the last several years
to address these hazards. In particular, there were important pro-
posals to change the Bankruptcy Code to clarify that pensions and
PBGC has some priorities in bankruptcy. These priorities, which
appear in ERISA, the law that set us up, and the Tax Code are
critical to reducing PBGC's losses and making sure that creditors
take pension underfunding seriously.

It should be remembered the recoveries are shared by the PBGC
with the participants that have nonguaranteed benefits. I urge you
to consider these bankruptcy reforms as well as the proposals put
forward by Congressman Pickle.

Another reform that would be helpful is that addressed by the
Aircraft Equipment and Settlement Leases Act. Last year I wrote
you in support of a similar proposal. Last fall PBGC and Continen-
tal Airlines obtained initial court approval of a settlement that re-
solved Continental's liability for the pension plans of Eastern Air-
lines. Because Continental was a member of the same control
group that included Eastern Airlines, PBGC asserted claims
against Continental for $700 million that existed when the Eastern
pension plans were terminated in 1990.

The settlement provides approximately $100 million recovery for
the PBGC. This recovery will not only benefit PBGC but again I
emphasize that the participants with nonguaranteed benefits.

The terms of the Continental PBGC settlement are a key part of
Continental's proposed plan of reorganization which awaits ap-
proval in the bankruptcy court.

The bill before you today would resolve the remaining obstacle
that stands in the way of the approval of this settlement. This bill
would ensure that certain arrangements entered into by the PBGC
and an airline would be treated as leases under section 1110 of the
Bankruptcy Code if all the parties to the agreement concur.

To reach a settlement Continental agreed to give PBGC an eq-
uity interest in 15 aircraft, which will be leased oack to Continen-
tal. The existing lenders will agree to this arrangement, however,
only if their interests continue to be protected by section 1110,
which protects lenders and lessors by allowing them to foreclose
upon leased or encumbered aircraft.

Section 1110 protection is important to PBGC and the lenders
because it means that if the airline files for bankruptcy again they
will be able to protect their interest in leased aircraft.

The complex settlement between the PBGC and Continental cov-
ering the largest claim in the bankruptcy is at risk because it is
unclear whether the leasing arrangement in the settlement is cov-
ered by section 1110 of the Bankruptcy Code. Because the PBGC
has required a minimum price guarantee when the aircraft are



sold, that may lead to the conclusion that the arrangement is a
debt obligation rather than a lease covered by section 1110.

Continental's other lenders may not agree to the settlement be-
cause of this uncertainty.

Section 1110 needs to be clarified in order to remove the final ob-
stacle to a fair and reasonable settlement between Continental and
PBGC. H.R. 1140 will allow PBGC to receive the protection of sec-
tion 1110 in the Continental and potentially other airline bank-
ruptcies.

Mr. Chairman, I commend you for introducing this bill and I
urge the committee to act promptly to approve this important legis-
lation.

Thank you.

Mr. Brooks. Thank you, Counselor.

[The prepared statement of Mr. Lockhart follows:]



8



Testimony of Junes B. Lockhart JH

Former Executive Director

of the

Pension Benefit Guaranty Corporation

before the

House Committee on the Judiciary

Economic and Commercial Law Subcommittee

March 10, 1993



Mr. Chairman and Members of the Subcommittee:

I am pleased to be here to discuss the PBGC and support your bill, H.R. 1140. J was the
Executive Director of the Pension Benefit Guaranty Corporation from 1989 until January of this
year. I am now t managing director at Smith Barney.

PBGC is a fovemment insurance corporation with the very important mission of supporting the
re tirem en t security of 41 million Americans in 67,000 pension plans.

While a vast majority of the nation's defined benefit pension plans remain well-funded, the
insurance program is racing growing problems from poorly-funded pension plans of troubled
companies. In 1990 and 1991 losses reached a billion dollars and in 1992 they exceeded $800
million. PBGC's deficit for the single-employer program has grown over the past three years
from $1.1 billion to $2.7 billion.

Underfunding in ongoing pension plans has doubled since 1990 to an estimated S51 billion.
Well over $30 billion of the unfunded liabilities is concentrated in the plans of relatively few
firms, in the steel, auto, tire, and airline industries. Financially troubled companies present a
near-term risk of about $12 to $20 billion. Our future rests on these companies and a handful
of oornpanies that are not now troubled.

Using the estimates of these troubled companies, PBGC's latest 10-year forecast shows a
pessimistic deficit range of $16 to $28 billion. It shows the large uncertainties PBGC faces, as
does OMB's forecast of net claims of $23 to $45 billion over the next 30 years.

The financial problems are a consequence of fundamental weaknesses in the insurance principles
supporting the program. The "moral hazards" of inadequate minimum funding rules, liberal
gua ra n t ees, low premiums for underfunded plans, and low recoveries in bankruptcy encourage
financially weak companies to underfund their pension plans.

As you know, legislative reforms were introduced over the last several years to address these
hazards. In particular, there were important proposals to change the bankruptcy code to clarify
that pensions and PBGC have some priorities in bankruptcy. These priorities, which appear in
ERISA and the tax code, are critical to reducing PBGC's losses and making creditors take
pension underfunding more seriously. It should be remembered that recoveries are shared by



the PBGC with participants that have non-guaranteed benefits. I urge you to consider these
bankruptcy rafoxmi as well as those proposed by Congressman Pickle.

One reform that would be helpful to the PBGC In the Continental and perhaps other cases is that
addressed by me "Aircraft Equipment Settlement Leases Act." Last year I wrote you in support
of a similar propoatL

Last Pall, PBGC and Continental Airlines obtained initial court approval of a settlement that
resolved Continental's liability for the pension plans of Eastern Airlines. As you know, because
Continental was a member of the same controlled group that included Eastern Airlines. PBGC
asserted claims against Continental for the $700 million in underfunding that existed when the
Eastern pension plans were terminated in 1990. The settlement reached with Continental last
Fall provides approximately an $100 million recovery for PBGC. This recovery will benefit the
PBGC and the participants with non-guaranteed benefits.

The terms of the Continental-PBGC settlement have been included as part of Continental's
proposed plan of reorganization, which awaits approval in the bankruptcy court. The bill before
you today would resolve the remaining obstacle that stands in the way of approval of this
settlement. This bill would ensure that certain arrangements entered into by PBGC and an
airline would be treated as leases under Section 1110 of the bankruptcy code if all the parties
to the agreement concur.

In reaching a settlement with Continental , the PBGC required assurance that the payments agreed
to by Continental would actually be made. In response, Continental agreed to give the PBGC
an equity interest in 15 aircraft, which will be leased back to the airline. The existing lenders
will agree to this arrangement, however, only If their interests continue to be p r otected by
Section 1110. Section 1110 protects lenders and lessors by allowing them to foreclose upon
leased or encumbered aircrafts. Prom the point of view of PBGC, as well as Continental's
existing lenders, Section 11 10 protection is important because it means that if the current plan
of reorganization fails and the airline files for bankruptcy again, they will be able to p ro tect their
interests in the leased aircraft.

The complex settlement between the PBGC and Continental covering the largest claim in the
bankruptcy is at risk because it is unclear whether the leasing arrangement in the settlement is
covered by Section 1 1 10 of the bankruptcy code. The aircraft that are covered by the settlement
are subject to existing financing arrangements and these lenders are protected and want to remain
protected by Section 1110. The arrangement with the PBGC may fall outside the scope of
Section 1 1 10 because the PBGC has required a minimum price guarantee when the aircraft are
sold that may lead to the conclusion that the arrangement is a debt obligation rather than a lease
covered by Section 1110. Because of this uncertainty. Continental's other lenders may not agree
to the settlement.

The uncertainty surrounding Seen on 1110 needs to be clarified in order to remove the final
obstacle to a fair and reasonable settlement between Continental and the PBGC. H.R. 1 140 will



10



Allow the PBGC to receive the protection of Section 11 10 in the Continental bankruptcy If and
when it negotiate* similar settlement with other bankrupt airline*.

Mr. Chairman, I commend you for introducing this bill and urge the Subcommittee to act
promptly to approve this important measure.



11

Mr. Brooks. Mr. Drabkin.

STATEMENT OF MURRAY DRABKIN, HOPKINS & SUTTER, ON
BEHALF OF THE NATIONAL BANKRUPTCY CONFERENCE

Mr. Drabkin. Mr. Chairman and members of the subcommittee,
it is a special pleasure for me to return to old haunts and to speak
to you this morning about this legislation.

I recall, Mr. Chairman, with very great pleasure and some nos-
talgia my 9 years with the Judiciary Committee and with the Sub-
committee on Bankruptcy and Reorganization many years ago and
I recall with particular pleasure working with you, Mr. Chairman,
on a considerable number of important things that we did in those
days.

With respect to this particular legislation, let me try to put it in
bankruptcy context, which is, I think, the role that I am supposed
to be playing here today. This legislation deals with the problem
of what happens in bankruptcy if somebody defaults on a lease of
aircraft or aircraft equipment, or doesn't make its payments under
a conditional sale contract or financing arrangement of some sort.

The general rule in bankruptcy is that the lessor or secured cred-
itor is harred by the automatic stay from repossessing that equip-
ment even where there is a default by the debtor without comply-
ing with certain procedural and substantive requirements. The
vendor or lessor has to go in and get a lift stay. If he is a secured
creditor, he has to satisfy the requirement that there is no ade-
quate protection, or that the debtor has no equity and the property
is not necessary for a reorganization.

If it's a lease, it's necessary for the lessor to go in and get the
court to require the lessee to assume or reject a lease. The court
can decide to give the lessee a particular amount of time in order
to do that.

The net result of all of this, of course, is that it takes some time,
some money, and some uncertainty as to whether and when the
lessor or the conditional seller can get the property back. The pur-
pose of that is to facilitate the reorganization plan and not strip
from the debtor property which is important for reorganization.

In 1957 the then-Bankruptcy Act was amended to provide an ex-
emption from these procedures for sellers and lessors of airline
equipment. I'm familiar with the provision because I worked on
that legislation as a staff member here in 1957. That provision, Mr.
Chairman, was the first piece of bankruptcy legislation you let me
work on.

The provision paralleled the then-existing provision for railroad
equipment. What it did was to exempt secured sellers of aircraft
equipment, and lessors of aircraft equipment, from the automatic


1 3 4

Online LibraryUnited States. Congress. House. Committee on the JAircraft Equipment Settlement Leases Act of 1993 : hearing before the Subcommittee on Economic and Commercial Law of the Committee on the Judiciary, House of Representatives, One Hundred Third Congress, first session on H.R. 1140 ... March 10, 1993 → online text (page 1 of 4)